2-4 Units: Comps or Income Approach?

Question

Hey guys,

So this may be a simple question, but are small multifamily properties (2-4 units) typically appraised using comps or using the income approach? I know SFR are always dealt with using comps and commercial properties use NOI to determine value, but what about the small multifamily, which is in between the two? Thanks everyone!

Dan Maciejewski · Answer

Technically, they are residential, so they are appraised using Comps.

Depending on the loan product, the lender may use rent rolls to qualify.  There are also "commercial" products for small multifamily that will look more at the numbers, although those will have closer to commercial rates.

For you as an investor -- always use income approaches to vet a property.  It doesn't matter what Sally paid for that duplex last week if she's losing money.  I prefer to start with a quick cap rate comparison, then get deeper into the numbers.  I'm usually going to be negative CoC in year one because I'm buying value-add that needs money spent on work.

People that look at CoC usually need to be buying turnkey to see good CoC in year 1.

Steve Morris · Answer

I know SFR are always dealt with using comps and commercial properties use NOI to determine value, but what about the small multifamily, which is in between the two?

Usually on smaller deals people use sales comps and $/SqFt is actually pretty accurate for similar (ie size, age, location) properties.

Problem with NOI/CapRate/CoC calcs is - Are you using REAL numbers or made-up broker pro formas (to go to extremes)?

Ben Morand · Answer

@Dan Maciejewski Thank you so much! I appreciate the in depth response. I’m trying to gauge my refinance appraisal estimation for these types of properties so I appreciate all of your help!